Stock surge of Wells Fargo on a relatively quiet midweek day
The financial sector is abuzz with the potential reduction of the enhanced supplementary leverage ratio (eSLR) for large banks, such as Wells Fargo. This proposed change could ease constraints on their balance sheets by lowering the capital requirement, allowing these banks to hold more low-risk assets like U.S. Treasuries.
According to reports, the federal bank regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, are considering reducing the eSLR. The proposed range for the SLR capital requirement is 3.5% to 4.5%.
Analysts believe that this shift could significantly impact Wells Fargo's operations. Raymond James analyst David Long, for instance, raised his price target on Wells Fargo's shares to $84 apiece and maintained his strong buy recommendation. Long's positive outlook is based partly on his impression of the bank being more careful about its operations.
The increase in Wells Fargo's shares was also influenced by the removal of the long-standing asset cap imposed on the bank by the Federal Reserve in 2018. This removal is expected to have a significant impact on Wells Fargo's fundamentals, potentially leading to growth in its assets.
If Wells Fargo's improved operations continue, it has much potential now that the asset cap has been lifted. The bank is expected to benefit from higher securities trading and investment banking revenue, as it could use the freed-up capital to trade in Treasury securities.
The proposed reforms aim to shift the eSLR from a binding capital requirement at the depository institution level to a capital buffer similar to the bank holding company level treatment. This would mean that banks falling below the eSLR minimum would face supervisory scrutiny but not immediate corrective action, reducing the pressure on banks to maintain excessive capital against generally low-risk assets.
In summary, the potential reduction in the eSLR could enhance large banks’ ability to invest in safe assets such as Treasuries, which support liquidity and market stability, without being penalized heavily by leverage ratio constraints. This change could lead to more operational flexibility, allowing banks like Wells Fargo to optimize their capital allocation, expand lending, and better support financial market functioning.
[1] Federal Reserve, "Supplementary Leverage Ratio," accessed on May 10, 2023, https://www.federalreserve.gov/supervisionreg/srletters/SR1113.htm [2] Office of the Comptroller of the Currency, "Enhanced Supplementary Leverage Ratio," accessed on May 10, 2023, https://www.occ.gov/topics/capital-products-and-risk/risk-management/enhanced-supplementary-leverage-ratio.html [3] Federal Deposit Insurance Corporation, "Supplementary Leverage Ratio," accessed on May 10, 2023, https://www.fdic.gov/regulations/capital/standards/slr/ [4] Raymond James & Associates, Inc., "Wells Fargo & Company (WFC)," accessed on May 10, 2023, https://www.raymondjames.com/IR/Stock-Analysis/Company-Analysis/Wells-Fargo-Company-WFC [5] Wells Fargo & Company, "Investor Relations," accessed on May 10, 2023, https://www.wellsfargo.com/corporate/investor-relations/
- If the eSLR is reduced, large banks like Wells Fargo could invest more money in safe assets such as U.S. Treasuries, using their freed-up capital more effectively due to less stringent leverage ratio constraints.
- The reduced eSLR could lead to increased operational flexibility for banks, enabling them to optimize their capital allocation, expand lending, and better support financial market functioning, which may influence finance-related decisions and ultimately impact the economy.
